• Pension freedoms rush to drawdown highlights volatility risk
• MetLife warns on early year losses of drawdown and impact on retirement planning
The launch of pension freedoms has seen a surge in drawdown sales with total amounts invested and numbers of customers outstripping annuities2 and MetLife estimates up to 25,700 customers have spent around £1.75 billion buying drawdown policies to the end of August.
However the start of pension freedoms has coincided with worldwide stock market volatility with the FTSE-100 sliding around 10% from the 6,833.5 level on April 2nd before the start of pension freedoms. The market hit a high of 7,104 on April 27th and has dipped below the 6,000 mark in the five months of pension freedoms with further volatility expected.
MetLife estimates total losses for customers to the end of August are £160 million with the recovery at the end of the month providing some late comfort. It is warning about the sequence of returns risk to retirement savers from traditional drawdown and how the impact of heavy losses early on in retirement can mean the fund runs out later on.
It believes the risk of volatility underlines the case for guaranteed drawdown solutions which guarantee an income3 for life no matter what happens to markets while also enabling customers to benefit from fund growth.
Dominic Grinstead, Managing Director, MetLife UK said:
“The new savers attracted to traditional drawdown by pension freedoms have had a harsh introduction to the new rules and many will be counting the cost of the global stock market slide.
“Markets of course go up as well as down but losses in the early years of a traditional drawdown are a major worry and the risk needs to be understood by anyone opting for drawdown as it has major implications for retirement planning.
“MetLife’s flexible Guaranteed drawdown delivers a guaranteed level of income for life which can increase depending on investment performance enabling savers to plan for the future with certainty while retaining flexibility.”
MetLife’s calculations show a £100,000 fund from which the customer is taking a £5,000 annual income rising by 3.5% a year would run out after 16 years if it suffers heavy losses in the first two years even if it then sees strong returns in later years.
MetLife’s Retirement Portfolio provides a unique investment growth lock-in so that any increase in the value of a client’s investment above their existing guarantee base is locked-in daily. MetLife has developed its innovative Active Asset Allocation which invests in a combination of the MetLife BlackRock Global Growth Fund and a range of MetLife Fidelity Corporate Bond Funds.
Guarantee charges start from 0.6% on the Secure Income Option and 0.3% on the Secure Capital Option. MetLife’s Active Asset Allocation has a total expense ratio of 0.55%. Minimum investments in Retirement Portfolio are £30,000.
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